Be Skeptical of ‘Real Estate 2.0’ and Zillow Stock

Stocks to sell

Online real estate is a booming market, and among the better-known players in that space is Seattle-based Zillow Group (NASDAQ:Z, NASDAQ:ZG). If you want to take a long position in this specific niche, buying Z stock is one of the simplest and most direct ways to do it.

The fundamentals don’t support the technical boost in Zillow stock.

Source: Shutterstock

August wasn’t exactly a great month for owners of Zillow stock, however, as the Z stock price tumbled from the $50 resistance level to the low $30s. Eventually, it bottomed out slightly below $30 in October. On the other hand, the earnings announcement of Nov. 7 looks like it could be Zillow’s pivot point. Is this the perfect time to start a position, or just another fake-out?

A Big Earnings Day for Z Stock Investors

Over the years, Zillow has earned first-mover status and brand-name recognition amid the online real-estate niche. In a research study authored by UCLA’s Edward Kung, the University of Southern California’s Davide Proserpio, and the National Bureau of Economic Research’s Kyle Barron, Zillow is characterized as “a website specializing in residential real estate transactions… [which] provides a platform for matching buyers and sellers in the housing market and landlords with tenants in the long-term rental market” where the listed prices “reflect sale prices and rental rates in the market for long-term housing.”

In other words, even high-level researchers consider Zillow’s real-estate data to be reasonably accurate and useful. For non-academic folks, it’s a quick and dirty go-to source of online real-estate info. Still, while the company has certainly carved out its niche in the industry, the Z stock price has been subject to the ups and downs of the broader real estate market as well as company-specific developments.

Things were looking pretty darned good, though, as Zillow stock traders bid the price up quickly on Thursday, Nov. 7 after the company’s third-quarter earnings data release. By the end of the following trading day, the Z stock price had gained slightly more than 12%. That marked a potential turnaround in the making for long-term Zillow shareholders.

Serious Growth…and Serious Losses

Personally, I see the buying frenzy as overdone as traders tend to make emotional short-term decisions. Plus, the data wasn’t all positive. I’m not suggesting that Z stock stakeholders need to dump their shares. However, booking profits isn’t the world’s worst idea after a 12% single-day gain.

The company’s press release, naturally, accentuated the positive data and put the bull case right on the front page:

Total third quarter consolidated revenue grew 117% year over year to $745.2 million, driven primarily by significant growth in the Homes segment…Our Premier Agent business drove third quarter IMT revenue to $335.3 million, a year-over-year increase of 7%. IMT segment margin improved year over year, reflecting focused cost control and continued operating leverage from our scale and leadership.

Obviously, it was the “117% year over year” part that caused monocles to pop out en masse. But the skeptic in me wonders whether this actually reflects well on the company. After all, this isn’t Amazon (NASDAQ:AMZN) circa 2016. It’s not as if everybody and their uncle is suddenly beating down Zillow’s doors.

In the year-ago quarter, revenue came in under analysts’ expectations, thereby helping the mathematical basis for the most recent quarter’s sales beat. Besides, the data indicates a third-quarter loss totaling $64.6 million, equivalent to 31 cents per share. Zillow CEO Rich Barton can go ahead and brag that “[t]his quarter’s results illuminate how Zillow Group is in the most favorable position to lead Real Estate 2.0,” but I’m not yet convinced that this is any better than Real Estate 1.0 or any other version.

The Takeaway on Zillow Stock

A deeper dive into the numbers, in my spectacularly humble opinion, simply doesn’t justify last week’s outright jubilation over a company that’s still working toward sustained net profitability. Show me a company with non-negative earnings per share, and I’ll show you a more positive attitude toward Zillow stock and toward Real Estate 2.0.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

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